In any other field, Jeffrey Brenner would be a millionaire. But because he’s in health care, he doesn’t know how he’s going to make ends meet. Like entrepreneurs in every market, Brenner thought outside the box. He discovered an ingenious way of lowering health care costs: focus on the “hot spots” of medicine — the high-utilizing, high spending patients — and solve their problems with unconventional care.

As described in a recent New Yorker article by Atul Gawande, Brenner is saving millions of dollars for Medicare and Medicaid. Were others able to replicate his methods, the savings for taxpayers would soar. So how much does Medicare reward Dr. Brenner for all the savings he creates for our nation’s largest health plan? Zip. Zero. Nada. How much does Medicaid pay for all the savings it realizes? Zilch. Zippo. Not a penny. In fact, Brenner is able to do what he does only because of grants from private foundations.

I think you can probably guess why there aren’t many Brenners in the health care system.

As for Gawande, his writing is nonpareil. I would give him an A on his ability to describe and explain. But he gets a C on understanding economics and an F on understanding ObamaCare. (More on that below)

Here’s what Brenner discovered. In most health care systems, a small number of chronic patients are responsible for a very large share of ongoing costs. For the most part, the health care system isn’t designed for these patients at all. And most things that employers do to try to control costs are not much help either. Take the case of Frank Hendricks (a pseudonym) in Camden, New Jersey:

Hendricks had severe congestive heart failure, chronic asthma, uncontrolled diabetes, hypothyroidism, gout, and a history of smoking and alcohol abuse. He weighed five hundred and sixty pounds. In the previous three years, he had spent as much time in hospitals as out. When Brenner met him, he was in intensive care with a tracheotomy and a feeding tube, having developed septic shock from a gallbladder infection.

Brenner had figured out a few things he could do to help. Some of it was simple doctor stuff. He made sure he followed Hendricks closely enough to recognize when serious problems were emerging. He double-checked that the plans and prescriptions the specialists had made for Hendricks’ many problems actually fit together — and, when they didn’t, he got on the phone to sort things out. He teamed up with a nurse practitioner who could make home visits to check blood-sugar levels and blood pressure, teach Hendricks about what he could do to stay healthy, and make sure he was getting his medications.

A lot of what Brenner had to do, though, went beyond the usual doctor stuff. Brenner got a social worker to help Hendricks apply for disability insurance, so that he could leave the chaos of welfare motels, and have access to a consistent set of physicians. The team also pushed him to find sources of stability and value in his life. They got him to return to Alcoholics Anonymous, and, when Brenner found out that he was a devout Christian, he urged him to return to church.

Following on this success, Brenner found that out of the hundred thousand people who used Camden’s medical facilities only a thousand people — just 1% — accounted for 30% of its costs. He then:

Made block-by-block maps of the city, color-coded by the hospital costs of its residents. The two most expensive city blocks were in north Camden, one that had a large nursing home called Abigail House and one that had a low-income housing tower called Northgate II.

[Over 7 ½ years] some nine hundred people in the two buildings accounted for more than four thousand hospital visits and about two hundred million dollars in health-care bills. One patient had three hundred and twenty-four admissions in five years. The most expensive patient cost insurers $3.5 million.

Brenner next formed the Camden Coalition to apply his methods to these patients. The results are impressive:

On its first thirty-six super-utilizers, they averaged sixty-two hospital and E.R. visits per month before joining the program and thirty-seven visits after — a forty-per-cent reduction. Their hospital bills averaged $1.2 million per month before and just over half a million after — a fifty-six-per-cent reduction.

Now for the bad news. Like many other providers of low-cost, high-quality care described at this blog site, Brenner and his colleagues leave tons of money on the table when they fail to practice medicine in conventional ways. There is no CPT code for social work activities — even if it saves the government millions of dollars. Brenner’s attempts to get Medicare and Medicaid to pay him in a different way have all drowned in a bureaucratic morass, even as Medicare is spending millions of dollars on pilot programs and demonstration projects “to find out what works.” And experiences just like Brenner’s are repeated again and again, day in and day out, around the country.

No one knows if Brenner’s techniques can be replicated (any more than we know if the medical practices of the Mayo Clinic or the Cleveland Clinic can be replicated). But there’s one way to find out: let Brenner become rich. Rich? Yes, rich.

The federal government should offer to let Brenner and his colleagues keep 50 cents of every dollar they save the government. Think that’s wimpy bargaining? Okay, make it 25 cents. Then let every other doctor, nurse, social worker, hospital administrator, etc., in the country know that the federal government is willing to change the way it pays for care. If you can save taxpayers money, you can make money — the more money you save, the more you earn.

Now back to Gawande. He actually believes that ObamaCare is going to liberate Brenner and people like him. “The new health-reform law — ObamaCare — is betting big on the Brenners of the world,” he writes.

Really? I think any objective observer will conclude just the opposite. Rather than freeing doctors, nurses and other providers to find the best ways of providing high-quality, lower-cost care, the whole philosophy behind the Affordable Care Act is one of regulation and control. Gawande himself described it well in an earlier New Yorker essay: doctors must learn to function like engineers, following a script that has been laid out before them — not like entrepreneurs thinking outside the box.

Doctors are already being herded into Accountable Care Organizations (ACOs) where the way medicine is practiced will be virtually dictated by a federal bureaucracy. In this new world, someone like Dr. Brenner treating a patient like Hendrick will not stand a chance. Did Brenner have the prescribed electronic medical record? Did he follow the checklist of inputs ACOs are supposed to follow? Did he manage all of the care — including hospital care? The answers are no, no and no. There is simply no place for the Jeffrey Brenners in the world of ObamaCare.

When is the last time you heard Barack Obama say he wants entrepreneurs to get rich solving the nation’s most pressing health care problems? When is the last time you heard him say he wants anyone to get rich doing anything? When is the last time you heard him say even a kind word about people who get rich?

Comments (52)

Well Dr. Kramer, I hope your you use more care in treating your patients than you do in commenting on Atul Gawande’s qualifications. He’s a practicing surgeon at Brigham and Women’s Hospital in Boston.

I wrote this up in my newsletter back in October. Dr. Brenner is trying to shoehorn his model into the Obamacare definition of an ACO, but most of the industry is going in exactly the opposite direction — serving the healthy to improve “population health,” and the hell with that handful of sickies.

This is what I wrote —

But on the other side of the continent, the AHA met in San Diego and came to the opposite conclusion. Joe Carlson reports in an article for Modern Healthcare that, “ACOs, as defined in the 900-page Power Point presentation otherwise known as the reform law, will pay healthcare providers to keep patients healthy before they even become hospital patients by arranging for providers to receive set pre-payments for care.” So, according to this, ACOs will spend their money on the healthy people so that they never need health care services.

He adds, “At base, hospitals being paid by ACOs need to start thinking about not just the health of the people who come through their doors, but about all the people who could potentially come through their doors. In other words, under ACOs, keeping people out of the hospital would be more profitable than filling up beds.”

Okay, but then what happens to that 1% of very sick people in Camden, NJ? Will there be any money available for them?

The answer may come from Stephan Rosenthal, “president and CEO of the Care Management Co., which manages pre-payments (read: capitated payments) for Montefiore Medical Center (in New York.)” The article says, “Rosenthal said the population-based approach to healthcare fundamentally alters how you think about healthcare finance.”

Hmmm. So, when we start thinking about “population health” instead of those pesky little sick patients, I guess we won’t have to worry about 1,035 patients in Camden, New Jersey, since they represent just a tiny fraction of “the population.”

But that doesn’t help us to understand ACOs very well, does it? Do we focus on those high-cost cases, or do we ignore them in favor of keeping yuppies well? The Modern Healthcare article likens ACOs to unicorns and quotes Martha Marsh, president and CEO of Stanford Hospitals and Clinics, as saying, “I defy anyone to define it.”

If the exercise here is, as usual, that someone who hates Obama writes a blog post for a crowd that hates Obama, I’ll give you an A for this piece, within this framework.

On the other hand, if the purpose is to look at a serious problem objectively and, better still, to propose a concrete, workable solution to a tricky problem – not arm-chair theory, but something so practical that it could be taken into the field – then I am afraid I would not give you a C, certainly not by Princeton standards.

The problem you allude to is nothing new. It is firmly rooted in the economic incentives inherent in the fee-for-service system. It would be apt to exist even in the absence of third-party payment, because of the asymmetry of information in the market for health care – certainly for the serious conditions you describe. Third-party payment, enjoyed even by NCPA employees, only amplifies the problem. There is absolutely nothing novel about this insight. It has been recognized for half a century or more, even before Medicare and Medicaid came on line.

For precisely that reason, the world has experimented with all kinds of alternative approaches. To my knowledge, in modern times it started with physicians in Germany during the first half of the 20th century who undertook to provide all needed health care for the workers of companies against a flat annual prepaid capitation — HMOs. Alas, many of these doctors happened to be Jewish, so it took nothing for the German Medical Association to persuade Hitler that this was a Jewish-Bolshevist idea. Fee for service triumphed ever since there.

But it has rule medicine in the US as well. Some caring American physicians, famously among them Sydney Garfield, had the same idea, putting it into practice in some rural California areas. During the war, industrialist Henry Kaiser asked Sidney Garfield to institute the model of prepaid capitation for his workers who were busily building Liberty ships. The model was highly successful and has survived to this day the often maligned Kaiser Permanente.

As you may know, this HMO model was fought viciously and tenaciously by organized American medicine which branded it as a Communist idea and declared fee-for-service to be the sine qua non of high quality medicine. It took the Supreme Court to pave the way for HMOs in America.

So most of the problems with US health care you identify already existed even before Obama was but a seed.

Now, the idea of bundled payment per episode of illness is another response to the fee-for-service problem. It is an alternative to prepaid, annual capitation. It is firmly pushed in the ACA, but it will work only if there are organizations that can accept bundled payments – hence the idea of the ACOs, whose design and marketing has been heavily pushed by fellow Texan Mark McClellan, President Bush’s CMS Administrator. Bundled payments and HMOs are now being pushed by President Obama and his crew.

Finally, you may be unaware that over two thirds of all Medicaid beneficiaries are enrolled in mainly for-profit Medicaid managed care companies who could easily apply and profit from Brenner’s model and are, in fact, trying hard to do that for the SNP population. It is, however, not easy at all. And the executive teams of these companies do get rich, John. Perhaps you did not know that.

But what you did not tell us is this: precisely, concretely, what should determine the cost benchmark, year after year, off which the cost savings to be shared 50:50 by payers and your would-be-entrepreneurs are to be calculated?

Would these cost benchmarks vary by region – e.g., be higher in McAllen, TX than in El Paso, TX or Minneapolis, MN? How would they change over time? Might it be AACPC in the country county in 2010, updated by some price indexed from here to kingdom come? What price index, if any? CPI? GDP Deflator, a medical care index that takes into account new medical technology?

Why don’t you come down to this earth, John, and write us a piece on precisely how you would set and maintain the cost benchmarks over time? And would there be any quality control other than consumer vigilance, even by semi-literate ones who could not read a train schedule?

And have you thought of former NY Lt Gov. Betsy McCaughey? Perhaps if George Bush had implemented bundled payments she would have slept through it or even praised it, and you too.

But if Obama or any democrat implemented bundled payments, there would be cries of “ they are paying your doctors to withhold needed care from you and to get rich” and “killing Granny” etc. You might do it yourself, John, because it is such a good sport.

Thousands of policy wonks have racked their brains trying to cope with the FFS problem you raise – Alain Enthoven in the forefront. Private insurers, too, have wrestled with it but never come very far. Indeed, John, why haven’t employers and profit-oriented insurers gotten together on your theoretical model which, as noted, is not actually yours? Many entrepreneurs could have gotten rich on it. Instead they got rich on business as usual. Is Obama to be blamed for that?

You may think that Consumer Directed Health Care (CDHC) is the answer we seek, but I demur. At today’s prices for biologics and hospital care, it takes almost nothing to exceed the deductible for a person as chronically ill as Dr. Brenner’s patients. Beyond that, presumably, there will be some third-party payer, facing precisely the payment problems they have faced for over 100 years.

It may make you and your readers feel good, John, to pick on Obama relentlessly. Some day you might even blame the Midwestern snow storms on him. But, sport aside, your litany does get boring.

You could make a better contribution by offering solutions that work not only at the casual theoretical level, but also on the ground, in the trenches, and not just for plastic or Lasik surgery, but for deathly ill patients with multiple chronic conditions. You have not done that. I invite you to do so.

After all, you had the ear of policy makers during 2001-6. And what did they do? Cope with the fee-for-service system?

The government has been willing to make some private companies rich off of Medicare/Medicaid. I have a friend who built a multi-million dollar company finding insurance claims “overpayments” (public and private) to healthcare providers (mostly hospitals). It’s known as an RAC -recovery audit contractor. His company made a certain percentage of the total amount of overpayments collected.

However, this has been controversial because these companies essentially make money by identifying tactical errors in documentation or billing that are then identified as fraudulent and then slapped with an additional fee over and beyond the disputed amount.

As usual, John Goodman hits the nail on the head, providing his readers (who obviously run the spectrum of political thought) with keen insight into a relevant issue.

This piece is about taking an idea that other levels and sectors of government have used – rewarding individuals financially in proportion to the savings that their ideas generate for identifying waste or improving processes – and applying it to the highly structured payment mechanism inherent in Medicare and any other fee-based system.

No intelligent reader is buying Prof. Reinhardt’s diversionary tactics. This article’s focus is not about dumping on the president. The approach doesn’t fail based on whether the level of financial reward is more or less than John proposes. And this isn’t about CDH, either – of course a chronically ill individual like the subject of the piece is going to blow through his deductible (while two-thirds of the population that doesn’t reach its deductible does behave differently when it spends its money).

The whole point is that we have adopted a regimented system of reimbursement (in both the public – which, with its volume and resources, dictates policy – and private coverage systems) that pays for specific services rendered. Clearly there are treatment approaches that don’t fit into the Current Procedural Terminology (CPT) coding structure and therefore are not reimbursed. If it costs, say, $500,000 annually to treat this patient and Dr. Brenner can reduce that cost to, say, $250,000 by coordinating the efforts of other agencies for which there is no CPT reimbursement, then he has helped taxpayers (not to mention the patient, with a better quality of life).

In almost any other industry, the market would reward him for increased efficiencies. If he worked for many local, state and federal government agencies, he’d be cited as a taxpayer hero and given a cut of the savings that his ideas generated.

There is a rule of thumb in public health circles – a mere 20 percent of the population generates 80 percent of medical claims. Five percent of the population consumes nearly half (49 percent) of medical services while the top one percent of the sickest people use nearly one-quarter (22 percent) of health care. Whereas it is easy to identify these high spenders after the fact, it is less easy to predict ahead of time which ones will become big spenders. As Greg points out, there does seem to be this fallacy that throwing money and services at the general public will lower spending by intercepting the five percent. But what inevitably happens is the money spent on the 95 percent is wasted while the resources spent on the sickest five percent of patients is insufficient to affect a change in their cost trajectory.

Regarding your contention that policy makers did little to improve health care between 2001 and 2006, consider the following three examples:

1. The effort to put individual health insurance buyers on an equal footing with those with access to tax free employer plans via the creation of tax free health savings accounts.

An estimated ten million people now have health savings accounts. The evidence suggests that CDHP health plans cut expenditures 4 to 15 percent in their first year and reduce the expenditure growth rate by 3 to 5 percent. There is no evidence that people in these plans avoid necessary care, their out-of-pocket costs are lower, and as far as can be determined their benefits are not limited to any particular SES group.

Balances in the HSAs are increasing according to a preliminary AHIP analysis, with an average of $2,050 in the accounts that have been funded.

2. Under a variety of waivers, states began experimenting with Cash and Counseling consumer directed care for Medicaid services. The results show that people get better care for the same or less money when they are freed from Medicaid restrictions. These programs allow Medicaid clients to determine their own payments for fee-for-service personal care.

3. Experiments with HSA type programs in SCHIP and Medicaid money were begun. Initial data showed that such programs have promise for improving outcomes and lowering costs. Unfortunately, new experiments of this type were outlawed in the 2009 SCHIP reauthorization act.

The implicit claim that fee-for-service payments are somehow responsible for the health care expenditure escalation is not well supported by the evidence.

In Medicaid, managed care has been found to increase expenditures without demonstrable improvements in health outcomes. Internationally, OECD percentage US health expenditure increases have been average for years even though it was largely FFS when other countries have managed care. Private insurance premiums also suggest that HMOs do not confer any particular savings over the standard PPO/FFS consumer directed plan.

Differences between HMO and FFS outcomes remain murky due to the different populations enrolled. Kramer et al. (2000) find that stroke outcomes are worse for people enrolled in HMOs. Smith et al. (2005) find that Medicare stroke patients in HMOs are more likely to be rehospitalized than FFS patients. They stress that this should not be used as a quality measure as CMS reimbursement policies have been continually redone to make FFS providers act more like HMOs.

Morgan et al. (2000) find indirect evidence that Medicare HMOs in South Florida ration joint replacements and that Medicare beneficiaries respond byu returning to the FFS system to seek care. A number of other studies suggest that HMOs enroll healthier populations.

Given the evidence showing that that capitated payments encourage providers to skimp on care for complex cases and the generally lousy state of metrics to measure outcomes, it seems irresponsible to assume that replacing FFS with capitated payments will have only favorable effects.

It is curious — and tedious — that the only partisanship going on here is from Uwe Reinhardt. Uwe and his ilk have been setting health policy in this country for 50 years or so. One failed idea after another. The only think that never changes is the hubris.

Your response to John is way overwrought which seems to be the typical reaction for dyed in the wool Obama supporting leftists—The right’s arguments emanate from hatred for Obama and are therefore, to be ignored, ridiculed and summarily dismissed. However, unlike many on your side, you at least put forth points of debate and solicit response.

I’m responding as a reader of this blog who has avidly followed the healthcare debate since Hillarycare and I’m just going to make 2 points:

1) The debate between the right and left on healthcare is fundamentally about government central planning vs. free market decentralization. I believe every problem we have with our healthcare system can be traced back to Medicare and until we can get government out of healthcare except for a very small safety net for the truly indigent, healthcare costs will continue to escalate and more and more rationing will be the government’s answer to its healthcare problems.

The idea that medical care cannot be obtained without third party payment for even basic medical/surgical needs feeds the beast that has ruined our healthcare system. Cutting that cord would be the first step in developing a truly free market healthcare system (like what is being built in places like India) that would be the envy of the world and where the healthcare needs of the entire population would be met just like housing, food and other necessities of life.

2) The only entities that can become wealthy off of healthcare now are private companies. Most of these are the owners or executives of health insurance, pharmaceutical, durable medical equipment, medical supplies, healthcare consulting, medical software/EMR companies–none of whom provide actual patient care or oversight. This is the big problem with healthcare and why as long as the government continues to be the largest healthcare payor, healthcare will forever be doomed.

Government provides round holes for square pegs, stifling innovation in the actual DELIVERY of healthcare which ultimately creates inefficiencies because of the lack of market and pricing feedback loops like within most other industries. Until trained medical professionals are free to practice and coordinate with other healthcare professionals, relieved of overbearing, expensive and unnecessary regulation and are able to collect direct payment for their services, our country’s healthcare system will continue on its downward spiral.

Central planners negate the fact that patients represent the cross section of people. Not everyone has the same expectations, needs, desires of our healthcare system yet central planners want to mandate a one size fits all for meeting the healthcare needs of the population. Let people make their own medical decisions, accept responsibility for their own medical decisions and doctors, hospitals, medical suppliers, etc. will all rise to the occasion to find their niche where they can make a profit by meeting the medical needs of a certain segment of the population. And people responsible for their everyday healthcare costs will make the connection between lifestyle habits and medical costs and will always seek value for their money.

Pertaining to Reinhardt’s comment: Not sure there is only one solution to achieving low-cost, high-quality health care, but rather an infinite number of solutions that will only be discovered when doctors and hospitals are free to experiment and get compensated for their efforts when they identify innovative solutions. Atul Gawande’s article is a perfect example of one doctor in one community that has found a way to save money for the Medicare and Medicaid programs despite the fact he has little — if any — financial incentive to do so.

Why might this work? Virginia Mason Medical Center (VM) found a lower-cost way to treat chronic back pain. The more efficient protocol generated far less revenue for them than the earlier treatment regimen. VM was still willing to use the efficient treatment if it could get a share of the savings. But Medicare does not have the flexibility to give Virginia Mason a cut of the savings. Geisinger Health System began offering a warranty for cardiac surgeries – as I recall the deal was they would bear the risk for readmission for 90 days if its reimbursement was 30% higher. But Medicare doesn’t have the authority to take them up on their offer.

Professor Reinhardt hit the nail right on the head. Dr. Brenner is practicing a holistic approach to medicine that other doctors avoid due to a lack of payment, care or laziness. His outcomes are positive and economical and should be a standard ACO’s can easily replicate. My oncologist took the same approach (as Dr. Brenner) with me, he made sure I was aware of all the resources available to me and he would call me after hours and on weekends to give me tests results, check my hydration, pain levels or to just ask how I was doing. He cared. Not about the money I generated for him but for me. That said a lot to me during treatment.

I see this as an economic fight not a discussion about best practices. Capitated payments verse fee for service. We know the free marketer’s want fee for service. that way they can bifurcate their fees into oblivion (which is bad for the patient) whereas those advocating ACO’s are taking a holistic approach (which is good for the patient) that may mean more coordination between expertise’s and additional work for the primary doctor but if the outcomes are better than the doctor has performed the duty they are being paid for.

Linda Gorman,
You write:
“The evidence suggests that CDHP health plans cut expenditures 4 to 15 percent in their first year and reduce the expenditure growth rate by 3 to 5 percent.
A clarification: do you mean “3 to 5 percent,” which is trivial or do you mean “3 to 5 percentage points,” which is huge? I’m hoping you mean the latter.

David, growth rates cited are from the May 2009 American Academy of Actuaries report. It found “trend rates lower than traditional PPO plans by approximately 3 percent to 5 percent. If these lower trends can be further validated, it will represent a substantial cost-reduction strategy for employers and employees.”

This was part of a discussion that said that CDH plan trends “ranged from -4 percent to -15 percent. Coupled with a control population on traditional plans that experienced trends of +8 percent to +9 percent, the total savings generated could be as much as 12 percent to 20 percent in the first year.”

LInda Gorman,
Thanks. So the mistake was in the original quote. People often confuse percent declines in growth rates with percentage-point declines. Given the authors’ conclusion that the cost reduction is “substantial,” they probably meant that the trend rates were lower by approximately 3 to 5 percentage points. I’m heartened by their findings if not by their misuse of language.

@Erik: This “free marketer” is agnostic between capitated payments and fee-for-service. The problem is that those who believe (without evidence) that government control produces a better result wish to impose particular payments systems. In the 1930s it was fee-for-every imaginable service. Now it is capitated payments for all. In a real market system it is likely that both kinds of compensation will exist at the same time.

Evidence for that comes from markets for legal services, car repairs, dentistry, plastic surgery, and vision correction. Not to mention obstetrics and the prices quoted for cash payment for joint replacements.

I dunno, I think Prof. Reinhardt made some good points. Nobody can deny that executives of Medicaid managed-care outfits make a heck of a lot of money. Just take a gander at the EDGAR database for their financial statements.

I don’t think that people like Dr. Brenner can be “systematized.” They are less prone to financial incentives than most people. Changing his financial incentives would change his behavior less than we think.

On the other hand, changing other physicians’ financial incentives to make them behave more like Dr. Brenner would also be challenging. If you wrap the social work into Medicaid, you get increasing centralization of government power, which has bad outcomes.

I hate to ever disagree with Linda Gorman, but I don’t agree that HSAs moved the needle on employer-monopoly health benefits. I have an HSA-eligible, HDHP, but I didn’t choose it. My employer’s HR manager did.

It is unfortunate that ACOs receive the attention that could be directed to the Independence at Home Act (IHA) which passed with bipartisan support for the coordinated care of the chronically ill in their own homes. The quality of the care is improved, the shared cost savings are enormous by keeping patients out of the hospitals (and readmissions). Save the hospital beds for acute care and pay MD- directed teams to go to the patient. Isn’t it the way we would prefer to be treated?

I could takle your comment seriusly if you had answers to the technical questions I raised in my comment.

By the way, as I recall John mentioned Obama in his piece, which really was a lament oover how we always have done health care in this country. Everthing John criticized about the eocnomics incentives inherent in healht care were in place before Obama arrived ion the scene and before the ACA was passed. In fact, the ACA merely perpetuates most of these prob lems, aside from trying to address them thrugh bundled payments.

Sop how is it that John can pick on Obama and it is not partisanship and when I claim that this is not a problem of Obama’s making it is partisnahip.

“In Medicaid, managed care has been found to increase expenditures without demonstrable improvements in health outcomes.”

I would be curious to learn about the studies showing it. Can you provide the links to them?

I ask because the major study of this issue done by the Lewin Group showed the opposite, as did an earlier study by Deborah Freund.

Furthermore, one must wonder why, if Medicaid managed care is more expensive with outcomes that are not better than traditional Medicaid, many Govenors, Republican and Democrats, opt for Medicaid managed care and Rick Scott, the new Governor of Florida, wants to put all Medicaid beneficiaries in Florida into it. Are these Governors crazy to do that, or do they know something?

So I am really curious about the studies you cite, and I mean it sincerely. Others on this blog may be interested as well.

“The idea that medical care cannot be obtained without third party payment for even basic medical/surgical needs feeds the beast that has ruined our healthcare system. Cutting that cord would be the first step in developing a truly free market healthcare system (like what is being built in places like India) that would be the envy of the world and where the healthcare needs of the entire population would be met just like housing, food and other necessities of life.”

It would be interesting to have a national referendum on the question whether the American people would prefer an India-style health insurance system (most people are completely uninsured in India) or the current system we have, even after adjusting for our higher average income.

You are absolutely the first one I have ever seen declare that India’s health system is the envy of the world. I don’t think China envies India’s health system, nor anyone else in Asia, nor do I believe we would.

To be sure, India does have a few outstanding hospitals and clinics serving mainly the upper crust and some foreigners. But health care for the bulk of the Indian population is miserable.

As to the role of government, I can agree that the statutory strictures imposed on any government program make these programs inflexible and therefore inefficient by design. Yet the American people, in what is said to be a democracy, have voted for heavy government involvement, presumably because they believe that for all of its shortcomings, government intervention in health care has net benefits. Or did some sinister external force impose Medicare and Medicaid on the American people, when the private sector could easily have taken care of the poor and the elderly? The set up we have has been chosen by a free people!

Finally, I must wonder why the private sector, serving the non-elderly, non-poor has pretty much the same problems with healht care as have the government programs. Why have not all the great ideas proposed on this blog been applied and become dominant in the private sector, which has been free to experiment? You blame everything on government. Fair enough. But why hasn’t the private sector shown the way?

It seems the Reinhardt solution is to use denial of care and death to control expenses. He apparently likes the Kaiser solution where I believe the profits made including those profits from denial of care can then be split between the physician partners and Kaiser in a 50:50 split.

@Professor Reinhardt: The case I was thinking of with respect to Medicaid managed care occurred in Colorado Medicaid. It isn’t an academic study. It is the experience of a state program that has been a Robert Wood Johnson test bed since the early 1990s and has tried very hard to increase managed care enrollment. In 2002-2003 the state enrolled 50 percent of Medicaid clients into one of five Medicaid HMO plans.

In December, 2006, the Colorado Department of Health Care Policy and Financing concluded that managed care did not save money. It noted that “Although managed care organizations should experience savings over fee-for-service due to their improved ability to reduce unnecessary hospitalizations, emergency room visits, and other overutilization, there are also extensive administrative costs for care management, utilization management, providing networking to ensure access, and other processes such as bill paying and risk management.”

Unbowed, the state went on to claim that a state managed HMO would allow the state to achieve “the efficiency of centralization.” In an effort to reach that transcendental state it has experimented with disease management and telemedicine and concluded that they do not save money, either. The only thing that has unambiguously saved money is consumer directed attendant support–essentially unmanaged care with a budget.

The Lewin study I’m familiar with specifically states that the reduction in Medicaid costs that result from managed care are due to lower service utilization. This might be a happy RAND HIE outcome in which health isn’t affected by service declines, but we don’t know because we don’t have enough follow-on data.

The Medicare Advantage data give me pause. The papers there seem to show that people disenroll in managed care when they become really ill and have a choice. This suggests that access to care can be a problem in managed care for the chronically ill. If true, it means that the cost savings attributed to managed care cannot be accurately evaluated without also looking at long term costs and whether people are treated appropriately and in a timely manner.

Anecdotal information comes from people on Medicaid who, as a result of various kinds of managed care, are often embroiled in all kinds of administrative proceedings in an effort to get the care that they are supposed to have. These costs are not measured in the academic studies that I have seen.

The academic studies that I’m familiar with seem to look at a limited portion of total costs–hospital days is a prime example. The problem is that in many cases managed care hospital days are something of an endogenous variable and the studies have limited follow-up of future expenses that might be caused by limited care now. The limited universe studied isn’t the fault of the researchers, because in many cases that data simply aren’t readily available, but they shouldn’t be making grandiose claims about the applicability of their results to community populations.

Papers like one by Pawaskar et al., who work for Eli Lilly, suggest that we don’t know a whole lot about some of the more subtle differences between capitated care and FFS. They found that medication adherence was lower for diabetic patients in capitated Medicaid plans. They had more hospitalizations and more ED use than people in FFS Medicaid. I have no idea how or if the populations and drugs in managed care or FFS differed, but the larger point is that until recently people haven’t even been out looking for these kinds of effects. Instead, they measure quality using really, really, basic measures of routine care.

Given the evidence, I think that caution is in order when it comes to annointing a best payments system. After all, people will die if one gets it wrong, and the history of central planning does not exactly inspire confidence.

“An estimated ten million people now have health savings accounts. The evidence suggests that CDHP health plans cut expenditures 4 to 15 percent in their first year and reduce the expenditure growth rate by 3 to 5 percent.”

This is interesting as my corporation has changed insurance plans a number of times. Spending drops the first year every time as people figure out what their plan does and does not cover. We return to normal later.

The Actuary study is, IMHO, beset with self selection problems. We need to see it done on a statewide basis with everyone participating. I am also concerned since deductibles have been growing in insurance plans, yet private insurance spending continues to increase at a rate equal to or faster than Medicare.

Uwe, It’s been a long day (being hassled in the hearing room by liberals and people who don’t understand even the concept of incentives) and I just got back to Dallas. You wrote:

“Thousands of policy wonks have racked their brains trying to cope with the FFS problem you raise – Alain Enthoven in the forefront. Private insurers, too, have wrestled with it but never come very far.”

That’s really too bad. They should have done something else with their time.

Almost anybody who has not taken a course in health economics or who has not been to Princeton or who doesn’t have a PhD or who doesn’t read health policy journals — that’s any normal person with a modicum of common sense — could figure this out in a second.

You don’t want someone who is saving you millions of dollars to worry about whether the electric company is going to turn off his lights. [The current policy.] So you offer to pay him enough so that he wants to continue what he is doing instead of doing something else, like playing golf or teaching. You don’t care very much about how he wants to be paid –fee for service, capitation, bonuses, cost plus, HMO, ACO, PPO, XYW, etc. Then you tell the world that anyone else who can save you money like Brenner is saving you money can get a very lucrative deal as well. Message: solve our probelms and you can get rich.

To paraphrase Bill Buckley, 100 people drawn randomly from the phone directory could do better than what we are doing right now.

BTW, I didn’t mean for my comments about Obama to sound personal. I try never to do that. What I meant to say is that the entire administration ignores the role of profit and entrepreneurship in achieving worthwhile goals.

A number of companies (e,g,. Whole Foods) have gone “full replacement,” which means the employees didn’t select the HSA or HRA plan, it was just given to them. In these cases there is no selection problem. The results look good, but I believe we have barely scratched the surface on what can be done.

@ Uwe again:

There is a lot to admire about India. I have written about it at this site, but don’t have time to search for the link. Basically, because there is no health insurance, hospitals compete on the basis of price and quality — much more so than in the United States and Europe. It suggests that if we had a casualty insurance model in which patients paid the marginal cost of their care we would have a very different and better health care system.

@ Eric

You wrote:

“I see this as an economic fight not a discussion about best practices. Capitated payments verse fee for service.”

What a strange statement. Aren’t their restaurants where you live that are fee for service (everything ala carte), as well as capitated (all you can eat) as well as a combination of the two? Why would you want to fight about which is best. When the market is allowed to work, you don’t have to.

Great post John, nothing more disingenuous than an ivy league educated conservative feigning populism. Just like the Buckley quote, with his inherited millions, which was his way of saying that Yale was waspier than Harvard.

Oh, Dr Brenner, he’s just practicing good medicine. What he’s doing should be made the standard of care. It’s not that he should be made a multimillionaire for practicing good medicine, the doctors milking the system should be subject to sanctions and fines. Behavioral Economics 101, negative incentives work better than bribes. That’s why people hold on to losing stock positions for too long, the think the position will come back and people can’t stand to lose.

Thanks, artk. I knew that at some point in this discussion someone would admit to the underlying problem. We have too many people like your self who do not want people to get their marginal product!

A guy saves we, the taxpayers, millions of dollars by being innovative and entrepreneurial and discovering things no one knew before and you conclude that it is his duty to do this. He should be sanctioned if he wants to get paid for it.

Would you apply the same principle to Bill Gates? Steve Jobs?

If someone can build a rocket to take peopole into space, they get a million dollar prize. If you solve the nation’s health care problems, you get nothing. You were just doing your duty.

John, you can’t have it both ways. On the one hand, the only rational way for Dr Brenner to really cash in on his technique is if you abandon fee for service, on the other hand you fill your comments with objections to ACO which would abandon FFS. The reality is that when you talk about “you get what you pay for”, the heavy government involvement in the health care systems of Taiwan, Singapore, Australia, Germany, France, England and every other industrialized western democracy do better at that than the US.

Artk, what kind of gooblygook is that? I have always been consistent about how to reform Medicare: Let the providers tell us how they want to be paid. Be ready to accept any new arrangement as long as it saves money and raises quality. Don’t dictate in advance how medicine should be practiced or paid for. Isn’t that what a rational buyer would do in any other market?

I wasn’t saying that India’s healthcare system is the envy of the world. India is, however, a laboratory of healthcare innovation, untethered by overbearing regulation and on the cusp of a healthcare revolution for its people. Yes, it suffers from tremendous poverty and its health population stats are low however, India’s ability to adopt and disseminate healthcare IT innovation and medical technologies, easily, cheaply and efficiently will escalate India’s healthcare status faster and better than any other country in history and all because its healthcare expansion is not shackled by a dominance of central planning like the rest of the world. The U.S. could experience such a revolution if its healthcare system was able to break free from government stifling.

Americans would gladly accept free market healthcare that was accessible and affordable. What we have now is a distorted healthcare market that is based upon perverse and destructive mechanisms. Of course, people look at a current hospital bill or the price of a PET scan or a laboratory bill or a pharmacy bill that is grossly inflated and has absolutely no relation to the direct costs and value of the service and conclude that medical treatment is not possible without third party payors. But, this is the result of 40+ years of market distortion and not real world market forces. Areas that do employ free markets in healthcare are the only areas that have followed principles of free markets such that market dissemination of technologies results in reduced costs and prices–LASIK, plastic surgery, some pharmaceuticals, OTC medical supplies.

It is currently just the opposite–the price of an MRI keeps going up no matter how old the technology and how many MRIs are installed. Same thing with dialysis equipment–cost of machines just goes up year after year despite this is a 50 year old technology. Lo and behold, pharmaceuticals can go off patent and then enter the OTC market at markedly reduced rates–another example of free market at work in healthcare that bypasses most other medical products and services. Medicare still reimburses Medicare supply over $100 for a walker when one can be had at Walmart for $29.99. And unfortunately, private health insurers like to use Medicare as a template for their own reimbursements and the folly has invaded our entire healthcare system. Private health insurers have contributed almost as much as government in distorting the healthcare market and have been part of the problem instead of the solution.

We would have to take active steps to establish free markets in healthcare and the market would respond like it does in every other area of personal service and retail. Prices would come down, private entities would establish brands, compete on price, diagnostic groupings, convenience, luxury, big box, etc. You have to really think outside the box to get there and unfortunately, our entire healthcare system has been operating with shackles and has not been able to tap its potential to meet the healthcare needs of the people of this country.

Sorry, getting winded.

Okay, onto your next claim–socialized healthcare came in response to demands of a democratic people. First of all, we are not a democracy. We are a Republic, and for good reason. We are supposed to avoid the perils of pure democracy that can evolve into mob rule. Our elected representatives are supposed to be appropriately versed on legislation before voting and apply educated reasoning in recognition (but not totally in deference) to the will of their constituents. But, that’s not what has happened. In fact, socialized medicine has been imposed on us from the left and has done so stealthly and incrementally.

You can go back over the history of Medicare and you will find that there was not a crisis in elderly medical care prior to 1965. Medicare was passed the same way Obamacare was passed–under deception and false pretenses. Read about it here: Medicare’s Origins: The Economics and Politics of Dependency by Charlotte Twight http://www.cato.org/pubs/journal/cj16n3-3.html

Basically, the elderly was identified as a group that could engender enough sympathy to garner public support for government financed healthcare. Medicare was the foot in the door for the socialists vision of national healthcare–see quote below.

Why did Obama declare victory for Obamacare as “something we have been trying to do for 100 years” (paraphrase) if Obamacare was in response to what was described as a failure of free market healthcare with 45 million uninsured, people going bankrupt, etc. etc. Was any of that going on 100 years ago? No.

Obamacare is, as is, Medicare, SCHIP based upon an ideology and not on objective evidence of its superiority to decentralized, free market healthcare. Proof? The 12,500 people who have signed up for high risk pools as outlined in Obamacare out of a 375,000 estimated. Again, ideology rules and “evidence” is presented that reflects that ideology rather than objective fact thus, we end up with huge disparities between what evidence is presented in order to get healthcare legislation passed and reality.

And then you can read how this ideology is being imposed upon our children when again, there has been no crisis of uninsured children in this country. Are American Children Being Lured Into Socialized Medicine? http://www.forhealthfreedom.org/Publications/Children/Luring_children.html In here, you will find a quote from one of the early professors and ideologues of Medicare:

“Moreover, many Americans are unaware that Medicare was created to serve as a stepping stone to socialized medicine for all Americans. Twenty-five years ago, health policy analyst Howard Berliner revealed that:

“Medicare was designed to eventually be expanded into a comprehensive and compulsory national health insurance system. …[H]ealth insurance for the aged was a strategy to get a ‘foot in the door.’ It was hoped that the small Medicare program would eventually be expanded to include everyone in the country.(16)””

A few years ago I was in contact with a man who went to India for a heart valve replacement. In the United States the “list price” was upwards of $200,000, whereas the surgery in India was $5,700. I think the entire trip only set him back about $10,000. The kicker… his surgical team headed by a prominent surgeon who had previously taught cardiac surgery at New York University Medical Center.

In a restaurant setting I the consumer choose what I want to eat and how I pay for my meal. With healthcare, you are suggesting it should be the doctor who chooses what I eat (treatment) and stipulate how I should pay.

I guess those pesky Librals really got to you today.

HOADS,
“Obamacare” was a Republican answer to “Hillarycare.” It should be called “Chafeecare” after it’s originator.

You write: “A few years ago I was in contact with a man who went to India for a heart valve replacement. In the United States the “list price” was upwards of $200,000, whereas the surgery in India was $5,700. I think the entire trip only set him back about $10,000. The kicker… his surgical team headed by a prominent surgeon who had previously taught cardiac surgery at New York University Medical Center.”

It makes me curious: We have Americans traveling to India to get this cardiac surgeons care there, which means there would have been a market for his services at his Indian prices here withut forcing people to travel to India.

So why did not this surgeon set up shop in New York or Texas and deliver heart valve surgery stateside fo $10,000 on a cash payment basis only?

Can anyone think of a reason? I don’t hink government would prohibit it.

Uwe asks: “So why did not this surgeon set up shop in New York or Texas and deliver heart valve surgery stateside fo $10,000 on a cash payment basis only?”

It sounds like there is a bit more to the story, but regarding the cardiac surgeon perhaps he was setting up a program and giving it legitimacy so that his pay came directly from the hospital. Alternatively, the surgeon was a “teacher” at NYU so perhaps he simply wanted to teach. In any event Medicare payments for valve replacement to the cardiac surgeon is not that much. Moreover the list price from the hospital can be multiples of what is actually paid.

I think because of the lack of foresight we lost an opportunity years ago to make health care a cash cow where it would be worth it for people other than the very rich to travel to the US for high tech care. That type of innovation has been successfully stifled by too much government control.

Doctors aren’t legally able to set up their own shops a lot of the time for many reasons. CON (certificate of need) rules–usually a politically motivated set of regulations to protect hospitals’ cash flow, process and requirements for JCAHO certifications that can make independent upstarts cost prohibitive for many specialties, limitations on physician owned hospitals which were basically outlawed in Obamacare, inflated US costs of pharmaceuticals, durable medical equipment and medical supplies for low volume purchasers, higher per capita costs of malpractice insurance for an independent physician clinic/hospital –to think of a few.

I can only speculate why Dr. Naresh Trehan did not set up a private, cash practice in New York City. Maybe he wanted to take his wealth and return home. Maybe exchange rates allowed him to invest more in India. Maybe the market for private health services was growing faster in India than New York State. Maybe the cost and hassle of doing business (malpractice insurance, Manhattan real estate, billing and collections, etc) was lower in India. There could be an infinite number of reasons.

Indeed, a few years ago I received orders from a firm in Houston, TX that was recruiting (doctor) investors for clinics in Monterrey, Mexico. The doctor-investors were to fly to Monterrey once a month or so to perform surgery on patients (many of which also flew to Monterrey). Why couldn’t these doctors perform the surgeries in Texas? There was apparently a reason; the recruiter bought hundreds of copies of my policy report on medical tourism to distribute in information packets.

Ralph Weber has a firm, MediBid, that connects cash-paying patients with doctors. Rick Baker has setup a firm (North American Surgery in Vancouver) to connect American cash-paying patients with American providers willing to cut deals for cash. BridgeHealth International (Denver) has a similar service that works with health plans.

The prices at North American Surgery are low ($16,000 to $19,000 for hip replacement depending on where it is done) but not as low as India.

One correction, I’ve looked back at my notes and the price for heart valve in India was $6,700 (2004) rather than $5,700.

If I’m not mistaken, Rick Baker owns a separate business (Vancouver-based Timely Medical Alternatives) geared to helping Canadian patients get care in the United States. North American Surgery, Inc. is his firm that connects uninsured Americans with health care providers willing to offer discounted treatments for cash.

Devon, heart valve costs money as well. What do you think happens to all those heart valves that are not the newest and revised? I don’t know, but it wouldn’t be uncommon for a patient to ask about the specific heart valve going into his body. That is just a small cost factor, but there are a lot of small cost factors.

“…one that had a large nursing home called Abigail House and one that had a low-income housing tower called Northgate II.

“[Over 7 ½ years] some nine hundred people in the two buildings…

“On its first thirty-six super-utilizers, they averaged sixty-two hospital and E.R. visits per month before joining the program and thirty-seven visits after — a forty-per-cent reduction. Their hospital bills averaged $1.2 million per month before and just over half a million after — a fifty-six-per-cent reduction.”

One of these buildings is a nursing home. The way this story is written, Jeffrey Brenner is tracking specific patients “its forst thirty-six super-utilizers”. Am I reading this right?

But if Obama or any democrat implemented bundled payments, there would be cries of “ they are paying your doctors to withhold needed care from you and to get rich” and “killing Granny” etc.”

We would only call them death panels if they destroyed private payers with artificially low taxpayer supported Obamacare fees, leaving all but the very rich to accept a single payer’s assessment of what to treat. Health insurance is expected to be limited, especially free public healthcare of last resort. But until Obamacare is enacted, most of us are free to chose a better insurance company if we don’t like their restrictions.

As far as the rest of your list of impediments goes, they’re easily overcome. Bid out Medicaid contracts by region. Measure average patient costs by region; adjust by the inflation index that is most reasonable and reward Medicaid Maintenance Organizations based on a percent of savings at a rate that’s just high enough to draw bids. Reassess and renew contracts every few years. This is not rocket science, as some pretend it to be.

Advocating the quality of Indian health care system as the basis of what a free market system can accomplish? Eh gads.

The overwhelming majority of Indians can’t and don’t use private services because they are still too expensive especially the private hospitals which are out of the price range of each what is considered middle-class Indians due to the large OOP expenditures & almost complete lack of private insurance that covers hospital stays. It is slowly changing but only slowly.

They rely upon gov’t healthcare services which are substandard but are either greatly reduced in price or free in some instances. Depending on the state/provincial gov’t, the accessibility and quality of these services can greatly vary but for the majority it is the only option available.

Its much worse in the country side where the primary clinic systems are woefully understaffed and poorly supplied. If you get sick or seriously ill there especially in more remote or poorly run states like Uttar Pradesh, your a goner.

The most important thing is the fundamental difference between Indian and Western views on the poor though. Life is generally cheap in India and my general experience has been that the wealthy think little to nothing of the poor. Poor or certain castes like the dalits are regarded as little more than faceless masses. One of the more vulgar experiences in my life was when I was in a car with Indian counterparts who advocated running over a poor family on a bicycle in front of us in order to get out of gridlock and get moving.

There are been some real interesting innovations on the cost-side especially in terms of medical equipment but Uwe’s right. If the Indian health care system is the model we are striving towards, most people are going to end up much worse off.

This is a good discussion. It could be a REALLY good discussion if all these great minds could work as one team to solve this serious problem. Way back at the start John said Brenner and his team should be handsomely rewarded for ripping massive costs out of the system. I wholeheartedly agree. Let’s drastically reduce federal spending on healthcare and make a whole lot of millionaires along the way. No argument. So far, I think Brenner, Gawande, and John are all correct. Then Professor Reinhardt pushed it further and said let’s take John’s idea and turn it into concrete rules so that hot spotting investors could model their future business properly. If I invest, how do I generate revenue? Again, 50% of what? It’s a fair point and no one has touched it yet. Hats off to Professor Reinhardt for asking the question. And on the cost side, no one has offered constructive suggestions on how to ensure poor, expensive patients like Brenner’s will still receive quality care.

There’s so much brain power on this blog. I encourage you to work together to engineer a solution to both of these sticky problems. The solutions don’t need to be perfect. But finding a 75% fix is way better than endlessly bloviating.

By the way, I’m just an average citizen outside the healthcare world worried about what kind of country we’ll be handing off to my two teenage kids. You guys are my heros. Good luck!